A Medical Savings Account Lets You Set Aside Pre-Tax Money for Health Costs

A Medical Savings Account (MSA) is a savings account paired with a high-deductible health insurance plan. Money you put into it is not taxed by the federal government, and you can withdraw it tax-free to pay for may have access to medical expenses. The account stays in your name — unlike a flexible spending account at work, which you lose if you leave your job.

The main appeal is the tax break. If you earn $50,000 a year and put $3,000 into an MSA, you only pay income tax on $47,000. That $3,000 grows without being taxed, and when you use it for doctor visits, prescriptions, or dental work, you do not pay tax on the withdrawal either. Over time, this can add up to real savings.

MSAs are not common — most people with health insurance get a different kind of savings account through their employer. But if you are self-employed, work for a small business, or buy your own insurance, an MSA may be available to you.

Key Takeaways

  • An MSA requires you to have a high-deductible health insurance plan, which means you pay more out of pocket before insurance kicks in.
  • Money you contribute to an MSA is not taxed, and withdrawals for medical expenses are not taxed either.
  • The account belongs to you and stays with you if you change jobs or insurance plans.
  • You can only open an MSA if you meet specific income and insurance requirements set by federal law.
  • Unused money in your MSA rolls over year to year and can be invested to grow.

How an MSA Differs From Other Health Savings Accounts

There are actually two types of MSAs: Archer MSAs and Health Savings Accounts (HSAs). An Archer MSA is the older version, created in 1996. It is only open to self-employed people and employees of small businesses with 50 or fewer workers. Very few new Archer MSAs are opened today because HSAs are more flexible and easier to use.

An HSA is the modern version and works almost the same way — you pair it with a high-deductible plan, contribute pre-tax money, and withdraw tax-free for medical costs. The main difference is that HSAs are open to anyone with a may have access to high-deductible plan, whether you work for a large employer, a small business, or yourself. If you are shopping for a health savings account right now, you are almost certainly looking at an HSA, not an Archer MSA.

Both are different from a Flexible Spending Account (FSA), which is offered through some employers. An FSA also lets you set aside pre-tax money for medical costs, but you lose any unused money at the end of the year — it does not roll over. An MSA or HSA is yours to keep.

What You Can and Cannot Pay For With MSA Money

You can withdraw MSA funds tax-free for a long list of may have access to medical expenses. These include doctor visits, hospital stays, prescription drugs, dental work, vision care, hearing aids, and mental health treatment. You can also use the money for medical equipment like crutches, wheelchairs, or blood pressure monitors.

You cannot use MSA money for health insurance premiums (with a few exceptions), cosmetic surgery, or over-the-counter medicines unless they are prescribed by a doctor. Gym memberships and general wellness products do not count, even if they help your health.

If you withdraw money for something that is not a may have access to medical expense, you pay income tax on that withdrawal plus a 20 percent penalty — so it costs you more than taking the money out of a regular savings account. Keep receipts and records so you can prove what you spent the money on if the IRS ever asks.

Income and Insurance Requirements to Open an MSA

To open an MSA, you must be covered by a high-deductible health plan. For 2024, a high-deductible plan means your deductible is at least $1,600 for individual coverage or $3,200 for family coverage. (These numbers change each year.) Your out-of-pocket maximum — the most you pay before insurance covers everything — must be no more than $4,050 for individual coverage or $8,050 for family coverage.

You also cannot be covered by any other health insurance at the same time, with limited exceptions for accident, disability, dental, vision, and long-term care coverage. If you are on Medicare, you cannot open a new MSA, though you can keep one you already have.

For an Archer MSA specifically, your employer must have 50 or fewer employees, and your income cannot exceed certain limits set by the IRS. These limits change yearly. An HSA has no income limits, which is one reason they are more popular.

How Much You Can Contribute Each Year

The amount you can put into an MSA each year is set by federal law and changes annually. For 2024, you can contribute up to $4,150 if you have individual coverage or $8,300 if you have family coverage. If you are 55 or older, you can add an extra $1,000 per year — this is called a catch-up contribution.

You can contribute the full amount all at once or spread it throughout the year. If you open an MSA partway through the year, you can only contribute a portion of the annual limit. Money you do not use stays in the account and earns interest or investment returns — you do not lose it at the end of the year like you would with an FSA.

If you contribute more than the legal limit, you have to pay taxes on the excess and may face a penalty. Your bank or the company managing your MSA should help you track how much you have contributed so you do not go over.

How to Open an MSA and Where to Keep It

You open an MSA through a bank, credit union, or insurance company — the same places that offer regular savings accounts. Some employers offer MSAs as part of their benefits package, in which case your employer may set one up for you. If you are self-employed or your employer does not offer one, you can open an MSA on your own.

Before you open an MSA, you must already have a high-deductible health insurance plan in place. Your insurance company or broker can tell you whether your plan qualifies. Once you have the plan, you can shop for an MSA at any financial institution that offers them.

When you open the account, you will provide your Social Security number and proof of your high-deductible coverage. The financial institution will report your contributions to the IRS on a form called a 1099-SA. You will also receive a debit card or checkbook to withdraw money, just like a regular savings account.

What Happens to Your MSA If You Change Jobs or Insurance

Your MSA stays yours no matter what happens to your job or insurance. If you leave your employer, you keep the account and the money in it. You can continue to use it for medical expenses as long as you live, even after you retire.

If you switch to a different health insurance plan that is not high-deductible, you cannot make new contributions to your MSA, but you can still withdraw money from it for medical costs. If you switch to a new high-deductible plan, you can start contributing again.

If you move to a different state, your MSA moves with you. There are no state-level MSA programs — they are all federal accounts. Your bank or financial institution may change, but the account itself remains the same.

Frequently Asked Questions

Can I use my MSA money to pay for my spouse's medical expenses?

Yes, if your spouse is covered under your family health plan. You can also use MSA money for medical expenses of your spouse and dependents even if they are not on your insurance plan, as long as you claim them as dependents on your tax return.

What happens to my MSA if I do not use the money?

Unlike a flexible spending account, unused MSA money does not disappear. It rolls over to the next year and the year after that. You can let it grow and use it whenever you need it, even years later or in retirement.

Can I invest the money in my MSA?

Yes. Many MSA providers let you invest the balance in stocks, bonds, or mutual funds, similar to a retirement account. You earn returns on the investment, and those returns are not taxed as long as you use the money for medical expenses.

What if I withdraw MSA money for something that is not a medical expense?

You will owe income tax on the withdrawal plus a 20 percent penalty. After age 65, the penalty goes away, but you still owe income tax on non-medical withdrawals. Keep receipts to prove what you spent the money on.

Do I need to report my MSA on my tax return?

Yes. Your financial institution sends you and the IRS a form called a 1099-SA showing how much you withdrew. You report this on your tax return. If you use the money for may have access to medical expenses, you do not owe tax on it, but you still have to report it.